For the past 20 years or so, Georgia has witnessed a steady increase in the number of rural hospitals either closing down or on the verge of becoming insolvent. The state government recognized the issue and decided to allocate some additional funding for these hospitals via state tax credits, called the Georgia HEART program. Georgia allocated approximately $60 million; however, the state cannot give money to the hospitals directly. So, they set up a program through which individual taxpayers can receive state income credits. An individual taxpayer can allocate some of the individual’s state taxes to a rural hospital that is designated in the program. For example, if the taxpayer has a $10,000 liability to Georgia, the taxpayer could simply buy a $10,000 credit and allocate those dollars to go to a hospital. The result is that the taxpayer doesn’t incur any cost, and the hospital receives the money. Before the tax law change, contributions to state income tax credit programs could qualify for a federal tax benefit as well. However, with the 2017 tax code changes and subsequent IRS treasury regulations, the charitable deduction would not be allowed for taxpayers going forward if they took the state credit.
As of today, this is still the case for an individual taxpayer. The individual can buy the credit and receive 100% of that back from the state. This is great for the hospitals, but results in no net financial benefit for an individual taxpayer; the benefit received is the rewarding feeling from helping a rural hospital!
However, the IRS has made some recent clarifications for businesses. If the business can show that they would benefit from the payment, the business can take a tax deduction and the individual business owner can also take a state tax credit on the personal income tax return. In the example above, that would mean a taxpayer would be made whole by the 100% state credit, but they would also deduct this from business taxes, and the profit would be the tax savings. Assuming the taxpayer was in a 37% federal tax bracket, the taxpayer would make a $3,700 profit on the tax credit contribution.
So, how does a business determine that they will benefit from payment to a rural hospital organization (RHO)? The IRS regulations state that the business can take a deduction if it “reasonably believes the program will generate a significant degree of name recognition and goodwill in the community, which will result in an increase in business revenue”. This is all a bit vague and hard to quantify, but in general, business owners in Georgia would need to have some economic interest to make the argument that the tax credit deduction would help their business.
Obviously, there is a lot of grey area here, and therefore, as all matters related to tax, consult your CPA! We are also happy to answer questions about the Georgia HEART credit.
